4 Reasons Why Estate Planning Is So Essential For Business Owners
With all of the responsibilities running a business entails, placing estate planning on the back burner might seem like the best allocation of your time and effort. However, preparing for the worst is one of your most pressing responsibilities as a business owner because although estate planning and business planning may seem like two separate tasks, they’re inexorably linked. Given that your business is likely your family’s most valuable asset, estate planning is crucial not only for your company’s continued success, but also for your loved one’s future wellbeing.
Without a proper estate plan, your team, clients, and family could face dire consequences if something should happen to you, but these dangers can be fairly easily mitigated using a few basic estate planning strategies. To demonstrate why proper estate planning is so important for business owners, here are four issues your company and family are likely to encounter as a result of poor estate planning, along with the corresponding estate planning solutions you can use to prevent those issues.
Issue #1: If your estate plan consists of only a will, your estate—including your business and its assets—must go through probate when you die.
When it comes to creating an estate plan, most people typically think of a will. While it’s possible to leave your business to someone in your will, it’s far from the ideal option. That’s because upon your death, all assets passed through a will must first go through the court process known as probate.
During probate, the court oversees your will’s administration to ensure your assets, including your business, are distributed according to your wishes. The downside is that probate can take months or even years, to complete and it can be expensive. Furthermore, probate is a public process, potentially leaving your business affairs open to your competitors. Plus, while your family and team may know how to run your company without you, they might be unable to access vital assets, such as financial accounts, until probate is concluded, and the legal fees could cause the assets they do manage to attain to dwindle.
This is all assuming your will isn’t disputed during probate. If your heirs disagree about whom you name to control your business and/or how the business assets should be divided, a vicious court battle can ensue and drag on for years, dividing your family and crippling your company.
Estate planning Solution: A much better way to ensure your business’s continued success following your death is by placing your company in a trust. A trust is not required to go through probate and all assets placed within the trust are immediately transferred to the person or persons of your choice in the event of your death or incapacity. Plus, trusts are not open to the public, so your company’s internal affairs would remain private and the transfer of ownership can take place in your lawyer’s office instead of a courtroom. Finally, trusts, especially irrevocable trusts, can help shield your business and its assets from creditors and lawsuits, which could threaten your company with you out of the picture.
Issue #2: If you become incapacitated by illness or injury and you haven’t legally named someone to manage your business assets, the court will choose someone for you.
Another issue with relying solely on a will is that a will only goes into effect when you die and offers no protection for your business if you’re incapacitated by accident or illness. With just a will or no estate plan at all, the court will appoint a financial guardian or conservator to assume control of your business until you recover.
Like probate, the court process associated with guardianship can be long and costly, and whether the guardian is a family member, employee, or outside professional, it’s doubtful that individual would run your business exactly how you would want them to. Not to mention that having a court-appointed guardian managing your business affairs can lead to serious conflicts and strife within both your team and family, particularly if you’re out for a lengthy period.
Estate planning Solution: One estate planning vehicle that can prevent this is a durable financial power of attorney. A durable financial power of attorney allows you to name the person you would want to run your business and handle all your other financial affairs if you ever become unable to do so yourself. This includes important activities such as managing payroll, signing documents, and making financial decisions.
This not only speeds the expense and delay associated with the guardianship process, but it also ensures that while you are incapacitated, your company and other financial interests will be managed by someone you trust, rather than relying on the court to choose someone for you.
Issue #3: If your business partner dies and you don’t have a legal agreement that allows you to purchase your partner’s share of ownership in your company, along with a source of liquidity to fund that purchase, you could find yourself in business with your partner’s heirs.
If you share ownership of your business with one or more other people, should your partner die without a plan in place dictating what happens next, the partner’s children could inherit his share of ownership in your business and you could find yourself in business with your partner’s kids or be forced to pay an inflated price for their share of the business. A similar situation could arise should your partner get divorced, and your partner’s former spouse is awarded a share of the company in the divorce settlement.
Estate planning Solution: To prevent such conflicts, you should create a buy-sell agreement. A buy-sell agreement outlines exactly what would happen to your business in the event an owner leaves the company for any number of reasons, or when one of the owners die, becomes incapacitated, or gets divorced.
For example, a buy-sell agreement can ensure that should certain triggering events occur, the remaining owners are able to purchase that partner’s share of the business. In this way, an effective buy-sell agreement can prevent you from having to deal with new partners you didn’t count on. At the same time, a buy-sell can help prevent your loved ones from getting stuck owning a business they don’t want and can’t sell.
In addition to having a buy-sell agreement in place, you will also need to have a source of funding that allows the surviving owners to buy out the deceased partner’s shares. In most cases, the best way to fund your buy-sell is by purchasing life insurance. For example, the company can purchase a life insurance policy on each of the owners, and the company would receive the death benefit to purchase the deceased owner’s share of the business and/or buy out the deceased’s heirs.
Issue #4: If you name a family member to run your company after your death and you don’t provide them with a detailed plan, your business can be ruined by just a few poor decisions.
There are countless stories of family members assuming control of multi-million-dollar businesses and running things into the ground in just a short span of time. If such massive fortunes can be squandered so easily, it’s seriously doubtful that smaller operations like yours will fare much better. Even if your successor doesn’t destroy your company, they can cause serious conflicts among your staff, clients, and family simply by managing the business radically differently than you. For this reason, simply naming a successor to take the reins in your absence is not enough.
Estate planning Solution: A comprehensive business succession plan can help ensure your company doesn’t fall apart when you pass on. Beyond simply naming a successor, such plans provide stability and security by allowing you to lay out detailed instructions for how the company should be run. From specifying how ownership should be transferred and providing rules for compensation and promotions to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a roadmap for your company’s continued success following your death or retirement.
Secure Your Business, Your Legacy, and Your Family’s Future
If you haven’t taken the time to create a proper estate plan, your business is missing one of its most essential components. As your Personal Family Lawyer®, we will work with you to create a comprehensive estate plan to ensure the company and wealth you’ve worked so hard to build will survive—and thrive—no matter what happens to you. Contact us today to get started with a Family Wealth Planning Session.
This article is a service of Levi Alexander], Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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